Scherzer Blog

No number, no lawsuit

Tossing a lawsuit alleging religious discrimination, the Sixth U.S. Circuit Court of Appeals found that an applicant could not sue after refusing to provide his Social Security number to a prospective employer. The plaintiff, an applicant for a position with an energy company, claimed that he had no number because he “disclaimed and disavowed it” on account of his sincerely held religious beliefs.

The company’s refusal to hire the plaintiff violated Title VII and Ohio state law, the complaint charged, requesting both injunctive relief in the form of a job and monetary damages. A federal district court judge dismissed the lawsuit, and the federal appellate panel affirmed.

Courts considering the issue apply a two-step analysis, the Sixth Circuit explained. First, the court determines whether the plaintiff established a “prima facie case of religious discrimination,” which requires proof that the plaintiff “(1) holds a sincere religious belief that conflicts with an employment requirement; (2) has informed the employer about the conflicts; and (3) was discharged or disciplined for failing to comply with the conflicting employment requirement.” If the plaintiff manages to establish a prima facie case, the burden shifts to the employer to show it could not “reasonably accommodate” the religious beliefs without “undue hardship.”

This suit failed under the first step, the panel said, because the Internal Revenue Code mandates that employers collect and provide the Social Security numbers of their employees. Because the company’s collection of the plaintiff’s number was a “requirement imposed by law” and not an “employment requirement,” the court had no need to consider the sincerity of the plaintiff’s beliefs.

The panel also noted that every other federal appellate court to consider the issue has concluded “that Title VII does not require an employer to reasonably accommodate an employee’s religious beliefs if such accommodation would violate a federal statute,” citing decisions from the Fourth, Eighth, Ninth, and Tenth Circuits, as well as federal district courts in Michigan and Virginia.

All of the courts have arrived “at the same, sensible conclusion: ‘

[A]n employer is not liable under Title VII when accommodating an employee’s religious beliefs would require the employer to violate federal … law,” the Sixth Circuit wrote. “This conclusion is consistent with Title VII’s text, which says nothing that might license an employer to disregard other federal statutes in the name of reasonably accommodating an employee’s religious practices.”

For employers, the decision provides even greater peace of mind. With five federal appellate courts in agreement that a religious discrimination claim will not stand against an employer that complies with federal requirements to collect an applicant’s Social Security number, companies do not have to worry about the merits of a Title VII lawsuit under such circumstances.

Read the opinion.

|Employment Decisions, Judgment, Legislation|

Do you know about specialty consumer reports?

Credit reports are a part of life, whether applying for a credit card or purchasing a home. But what about specialty consumer reports?

Many people are unaware that dozens of other types of consumer reports exist, filled with information about medical and prescription history, for example, or insurance claims. Specialty consumer reports gather data from a wide variety of sources including information provided by consumers on applications (such as an apartment lease or a wireless phone contract) as well as public documents like criminal records and marriage licenses.

The reports provide information geared for a specific industry. A truck driving company might purchase reports that detail a job applicant’s driving record and motor vehicle insurance claims while an insurer will review a report with claims filed by a homeowner to check an individual’s historic use of insurance policies. Other niche reports provide data on loan balances, information about any bounced checks, and bank account history for lenders; another company tracks consumers’ product returns and will alert large retailers for fraud prevention purposes.

The Fair Credit Reporting Act (the “FCRA”) entitles consumers to one free report per year from any nationwide credit or specialty reporting agency (plus another free report if an adverse action has been taken, or the consumer disputes an item in the report that was corrected).

Recently, consumer rights group Consumer Action focused on the issue of specialty consumer reports in an “Insider’s Guide to Specialty Consumer Reports: A Guide to Obtaining, Understanding and Managing Your Information,” complete with a directory of furnishers. Staffers went through the process of requesting their own reports to help provide information for consumers about the types of reports available and their rights to request reports or correct errors.

Access the Consumer Action guide.

Read the directory of specialty consumer report furnishers.

|FCRA, Fraud|

Financial regulators focus on vendor due diligence

In the wake of the economic crisis, financial institutions have faced a wave of new rules and regulations. From the Dodd-Frank Wall Street Reform and Consumer Protection Act to regulators stepping up their enforcement efforts, regulated entities must ensure compliance with a host of new requirements.

The rules and heightened oversight go beyond banks themselves, and are increasingly focused on their third-party vendors. In many cases, vendors are not allowed to work with regulated entities unless they can demonstrate their compliance with various data security and privacy requirements.

Last year, New York’s Department of Financial Services (the “DFS”) sent letters to banks nationwide expressing concern about the state of their cybersecurity practices with regard to third-parties. DFS Superintendent Benjamin Lawsky requested that recipients disclose “any policies and procedures governing relationships with third-party service providers” as well as “any due diligence processes used to evaluate” all types of providers, including accountants and law firms. “It is abundantly clear that, in many respects, a firm’s level of cybersecurity is only as good as the cybersecurity of its vendors,” Lawsky wrote.

In “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” the Securities and Exchange Commission (the “SEC”) and the Department of Justice (the “DOJ”) state that the agencies “assess whether the company has informed third-parties of its compliance program and commitment to ethical and lawful business practices, and where appropriate, whether it has sought assurance from third-parties, through certifications and otherwise, of reciprocal commitments.” To avoid regulatory action, the SEC and DOJ also suggest that regulated banks and financial institutions consider providing training to vendors.

The Office of the Comptroller of the Currency (the “OCC”) released new guidance in October 2013, advising banks to take a “life cycle” approach to managing third-party relationships (such as security providers, affiliates, consultants, joint ventures, and payment processors) from planning and due diligence to ongoing monitoring and termination.

When conducting due diligence – commensurate with the level of risk and complexity presented by the relationship – financial institutions should not rely on prior knowledge or experience of the third-party, the OCC said. Instead, they must conduct an “objective, in-depth assessment of the third-party’s ability to perform the activity in compliance with applicable laws and regulations and in a safe and sound manner” including a review of the third-party’s financial conditions (like any pending litigation or audited financial statements), reference checks, and evaluation of the entity’s legal and regulatory compliance.

Contracts should specify compliance with the regulations of relevant law, such as the Gramm-Leach-Bliley Act, the OCC added, and provide the financial institution with the power to conduct compliance reviews of the third-party.

Not to be outdone, the Consumer Financial Protection Bureau (the “CFPB”) followed up in January 2015 with the latest addition to its loosely-sewn patchwork of vendor management best practices and requirements. Compliance Bulletin 2015-01 which, among other directives, puts CFPB-supervised entities on notice that they may not invoke non-disclosure agreements to avoid complying with requests from the CFPB to produce a third-party’s confidential information.

For nonbanks and service providers still coming up-to-speed on the CFPB’s supervision and enforcement, confidentiality obligations, audit rights, vendor training responsibilities, and remedies for vendor breaches are among the more thorny agreement provisions that may need to be enhanced in light of developing trends.

Read OCC Bulletin 2013-29.

Read the SEC’s and DOJ’s “A Resource Guide to the U.S. Foreign Corrupt Practices Act“.

Read CFPB Compliance Bulletin 2015-01

|Legislation|

Securities class actions remain popular

For regulated entities, an enforcement action by a government agency is practically guaranteed to result in a parallel consumer class action.

Nowhere is that more clear than for publicly traded companies regulated by the Securities and Exchange Commission (SEC). Securities class actions were considered to be so rampant that in 1995, Congress enacted the Private Securities Litigation Reform Act (PSLR) to curb what the industry believed were abusive practices.

While the statute raised the bar for private enforcement actions, it certainly did not close the courtroom doors to plaintiffs. Although there are fewer suits brought today, complaints are still filed lockstep with an agency enforcement action and in significant enough numbers to keep companies on their toes.

Industry watchers predicted that a seminal case decided by the U.S. Supreme Court last term, Halliburton Co. v. Erica P. John Fund (Halliburton II), would result in a decrease in class actions filed. That case involved a popular theory known as “fraud on the market,” where plaintiffs were not required to demonstrate that each individual class member relied on any allegedly misleading statements if the security at issue could be shown to be “efficient,” or with a market price reflecting all of its publicly available information.

While the Court did not toss the theory, the justices held that defendants can rebut the presumption prior to class certification. The June decision appeared to have little impact on the figures for 2014 filings. For example, NERA Economic Consulting reported that 221 securities class actions were filed last year, compared to 222 in 2013 and 212 in 2012.

Interestingly, although the number of complaints in securities class actions has not fluctuated much over the last few years, the aggregate amount of investor losses has declined, NERA found. 2014 saw a drop to $154 million from $159 million in 2013, down significantly from $243 million in 2012 and $248 in 2011. Are certain industries facing more lawsuits than others? NERA reported that one quarter of all of the securities class actions were filed against companies in the health technology and services area. Other major players: the finance industry, in second place with 19 percent of the suits, followed by the electronic technology and service sector with 13 percent.

Securities class action plaintiffs are also continuing a trend of settling prior to trial. Of all the pending and newly filed cases in 2014, just one lawsuit was actually tried to verdict (resulting in a plaintiff victory). Almost half of the cases ended on the defendant’s motion to dismiss (48 percent last year with an additional 21 percent dismissed in part), NERA found; 75 percent of the cases that survived settled prior to the class certification stage of litigation.

Read the U.S. Supreme Court’s opinion in Halliburton II.

|Lawsuit|

Asset searches: who can get bank information and why

Accessing bank account information can be vitally important, particularly for those engaged in a lending transaction seeking to fulfill due diligence requirements. But getting your hands on the information can be a challenge.

Asset searches are not illegal. However, certain methods to obtain bank or investment account information can be, such as pretext calling. The simplest way to obtain financial information is via the account holder, a designated representative, or a party with a valid court order. The first two options are unlikely to be forthcoming. As for the third choice, obtaining a court order to access such information can be time-consuming and costly.

Access to financial information is regulated by both federal and state laws. For example, the Gramm-Leach-Bliley Act (GLBA) prohibits obtaining customer information from a financial institution under false pretenses and imposes an obligation on financial institutions to protect customer information. Generally, a “customer” is defined as an individual consuming goods or services for personal or household use, although some authorities have included sole proprietors, partnerships of five or fewer, and other small businesses to receive the same privacy protections. For businesses, the issue of data protection is governed by contract. While the consumer protection provisions of laws like the GLBA would not apply, it does not mean that financial institutions can freely share their information.

International asset searches present their own set of problems. Other countries – particularly those in the European Union – have strict data privacy laws that prohibit any access to personal information as well as the transfer of data across national borders. Federal law also comes into play, with the Foreign Corrupt Practices Act presenting potential liability issues if an entity searching for asset information obtained the information by illegal means (such as bribing a banking or government official).

What about judgments? While a judgment cannot by itself force a bank or brokerage firm to disclose account information, it allows a creditor to use the court to seize the debtor’s assets. With a judgment in hand, a creditor can file for an order of examination which will require the debtor to disclose – under oath – the location of assets, details about income, or other relevant information. However, the judicial process of obtaining a judgment reveals the intent of the creditor and can give the debtor time to empty an account or move assets prior to the court entering an order. Judgments can also be tricky to enforce. State law governs judgments with specifics varying in each jurisdiction. In California, a creditor must obtain a writ of execution directing a levying officer (usually a sheriff) to serve the writ on the named institution. The institution must then freeze the specific account(s) or, in certain situations, turn over the balance in the account. Serving a writ of execution in California was recently simplified to allow service on a “central location” designated by a bank with nine or more locations in the state or accept service at any branch without such a designated office.

Long-arm statutes can be used to reach accounts in a jurisdiction other than where the judgment originated. A debtor can object to the attempt and courts typically impose a test of whether the debtor or third party (like the bank or brokerage holding the assets) has connections with the court or creditor, which, at a minimum, can delay the process and make it more expensive.

For assets like stocks, bonds, and commodities, creditors can again obtain a court order that can liquidate the account into cash to be turned over to the creditor. It should be noted that certain types of accounts (notably retirement accounts) cannot be reached, even in cases of fraud. To preserve an account balance, a creditor can serve a levy on a brokerage in order to put a hold on the account while waiting for a court order.

Public records – ranging from property records to litigation – can also help locate or confirm a debtor’s assets. One important consideration: it is essential to vet any company that purports to be able to obtain financial account information. Many misleading claims and offers about obtaining such information can be found on the Internet and creditors should ensure that any data obtained was in accordance with applicable law and regulations.

|Criminal Activity, Employment Decisions, Guidance|

Going global: international background checks

As the business world increasingly goes global, even small or medium-sized companies may have international outposts or employees located beyond the U.S. border. In addition, with security – both physical and digital – an important issue, employers want to know everything they can about their employees.

Many employers are turning to international background checks. But a criminal record or a credit report like those used in the United States can get lost in the translation.

First up: cultural norms. What may seem perfectly routine and acceptable in the United States may confuse or offend those in other countries. For example, things like credit checks and drug tests are virtually unheard of abroad and cultural differences may yield what might by American standards be unusual answers in a personality test. A second important consideration: the law. Just as the U.S. has the Fair Credit Reporting Act (FCRA) and other regulations setting the boundaries of background checks, foreign jurisdictions have their own laws of the land. The French Labor Code, for example, requires that its “works council” review employment screening procedures prior to an employer’s use.

One huge legal complication can be found in the area of privacy law. The European Union imposes restrictions on obtaining information about employees or applicants, the way in which such information can be used, and how the information can be shared or transmitted. To alleviate some of the liability concerns, the U.S. has entered into a Safe Harbor framework with the European Commission, which requires compliance with seven principles of data security. And while the EU leads the pack, other countries (like Australia, Canada, Hong Kong, and Japan) also pose challenges with their strict regulation of privacy.

Having an applicant sign a consent form to release information may be of little help as several EU countries also recognize a presumption against enforcement of such agreements on the basis that employees and applicants have limited bargaining power in the employment context. Alternatively, employers may have better luck by having applicants do the work themselves, providing their own background information to avoid implicating data privacy laws. Of course, this raises authentication and accuracy questions.

The collection of criminal information can also present logistical challenges. Many countries do not have an organized court system, and records, if available, may have to be searched on a regional or town-by-town basis, or at multiple agencies (like the police, the court venue and a government agency, for example). Certain countries offer what is known as a “police certificate” which will confirm the information about an applicant found in police records. Some countries, like Poland, have banned the collection of criminal records altogether; Spain prohibits the possession of records but an applicant could, in theory, show an employer his or her record.

If the screening is being conducted by a consumer reporting agency located in the United States, the FCRA requirements also come into play. International background checks are not impossible, but they do pose a number of legal and cultural risks that can be tackled with the right planning and professional assistance from an experienced background screening company.

|Criminal Activity, Educational Series, Employment Decisions, Fraud|

Privacy laws gain momentum in Congress

President Barack Obama has made data security a priority in recent weeks.

Speaking at the Federal Trade Commission (FTC) in January, the President announced three pieces of legislation: the Student Digital Privacy Act (which would prohibit the sale of sensitive student data for non-education purposes), the codification of the Consumer Privacy Bill of Rights issued by the White House in 2012, and the Personal Data Notification & Protection Act.

Implicating businesses across the country, the Data Notification Act would establish nationwide, uniform data breach notification rules that would preempt the existing collection of 47 different state laws. Criminal penalties for hackers would also be strengthened and companies would be required to notify consumers of a breach within 30 days.

Broader than prior proposals of federal data breach notification bills, the Act defines “sensitive personally identifiable information” to include a range of data, like an individual’s first and last name or initial and last name in combination with two other items like a home address or telephone number, birthdate, or mother’s maiden name, a Social Security number by itself, and a user name or e-mail address in combination with a password or security question answer that would permit access to an online account.

The notice provisions allow companies to inform consumers of a breach by mail, telephone, and e-mail, under certain conditions. When more than 5,000 individuals are affected in a single state, media notice is required; if more than 5,000 total individuals (regardless of residence) are impacted, the company must also notify credit reporting agencies and the federal government.

Although the bill designates the FTC as the primary enforcement agency, with the authority to promulgate rules pursuant to the law, the measure also requires the agency to coordinate with the Consumer Financial Protection Bureau (CFPB) where a data breach relates to “financial information or information associated with the provision of financial products or services.”

Some exemptions are included in the proposed bill. A business that does not access, store, or use covered data for more than 10,000 individuals during a 12-month period is exempt from the individual notice requirements. Safe harbor is also provided for companies that conduct a “risk assessment” that determines the data breach did not result in – and will not result in – harm to affected individuals. The business must notify the FTC of its “risk assessment” results and affirmatively indicate its intent to invoke the safe harbor.

A few days after he presented the proposal, President Obama reiterated his intent to pass data security measures in his State of the Union address, sending a message that he is focused on cybersecurity and privacy in the coming legislative session. Recent high-profile cyberattacks and data breaches (think Sony and Target) have also led to support from lawmakers and consumers, giving the bill momentum, but the question of its passage remains uncertain.

Learn more about Personal Data Notification & Protection Act

|Legislation|

Trend of suing employers for technical FCRA violations continues

The threat of a multi-million potential class action lawsuit alleging technical violations of the Fair Credit Reporting Act (FCRA) continues to haunt employers, even where the plaintiffs have alleged or proven no harm.

Pursuant to the statute, employers are required to “provide prior written notice before they can procure a consumer report about any employee or applicant for employment.” Just as important, 15 U.S.C. Section 1681b(b)(2)(A)(i) adds that the notice must be given “in a document that consists solely of the disclosure.”

Seeking to take advantage of the statutory damages available under the FCRA – from $100 up to $1,000 for a willful violation – plaintiffs have challenged employers’ use of a disclosure form that combined the written notice to procure a consumer report with other information or documents, such as an application form.

The trend to sue for FCRA technical violations was started by Singleton v. Domino’s Pizza, LLC in the U.S. District Court of Maryland (case no. 8:11-cv-01823-DKC) where the court ruled that inclusion of a liability release in the employer’s disclosure/authorization form violates the FCRA. Domino’s ended up reaching a settlement with the plaintiffs in 2013 for $2.5 million.

Also taking a strict reading of the statutory language, the Western District Court of Pennsylvania ruled in 2013 in Reardon v. Closetmaid Corporation (case no. 2:0S-cv-01730) that an employer could be liable for the combination of a disclosure/authorization with a liability waiver, and granted summary judgment in favor of the roughly 1,800 job applicants.

In a more recent example, a class of applicants sued Publix Super Markets in the U.S. District Court for the Middle District of Tennessee (case no. 3:14-cv-00720) also based on a violation of the sole disclosure requirement and release of liability. With Domino’s and Closetmaid’s payouts looming over its head and a class of 90,000, Publix agreed to settle the claims for $6.8 million earlier last year.

Although these companies opted not to fight the suits on their merits, a defendant in a case filed in the U.S. District Court for the Eastern District of California (case no. 1:14-742-WBS-BAM) did and won dismissal in October 2014. Syed v. M-I LLC involved identical claims but the judge reached a contrary decision, finding that the FCRA text was not as clear-cut as the plaintiff claimed. Immediately following the subsection mandating the sole disclosure of the employer’s intent to procure a consumer report is a provision that states that the consumer’s authorization is to “be made on the document referred to in clause (i)” – “that is, the same document as the disclosure,” the court noted, and “…thus, the statute itself suggests that the term ‘solely’ is more flexible than at first it may appear…”

The Syed decision is the second one that may give hope to employers facing similar suits. (There are at least six class actions pending.) But the obvious answer for companies looking to avoid the problem entirely is simple: use a standalone disclosure/authorization form that is separate from any other information or documents.

|Employment Decisions, Lawsuit|

Beware of loopholes in reporting on securities brokers

When considering the track record of a securities broker or dealer, investors should be cognizant of loopholes in background reporting.

The Financial Industry Regulatory Authority (FINRA) oversees the regulation of brokers and operates BrokerCheck, an online database that contains disciplinary records of registered brokers. But a review by the Wall Street Journal found that BrokerCheck is sorely lacking a wealth of information about registered brokers, some of which can be found in the records of state regulators. At least 38,400 brokers have regulatory or financial red flags that appear only on state records, according to the WSJ’s investigation; of those brokers, at least 19,000 had clean BrokerCheck records. One significant area omitted by FINRA: internal reviews.

The WSJ identified 4,346 brokers with one or more internal reviews reported on their state records but not on BrokerCheck. Other regulatory red flags not spotted on FINRA’s database: personal bankruptcies filed more than 10 years ago, judgments and liens that have been satisfied, and certain employment terminations.

FINRA’s records do include complaints against brokers, regulatory actions, terminations for cause, and personal bankruptcies filed within the last decade, which the agency says is consistent with the Fair Credit Reporting Act. But in light of the gaps – and a proposal from FINRA to the Securities and Exchange Commission to expand the obligations of financial institutions with regard to the background screening of applicants (https://scherzer.co/sec-considers-background-check-rule-proposed-by-finra/) – investors should consider checking state regulatory records to form a more complete picture of a broker’s history.

In response to the WSJ’s inquiry, FINRA launched a review of its database and said the agency is studying the current rules about the information disclosed on BrokerCheck. The agency is also attempting to patch a separate loophole by coordinating its efforts with state insurance regulators. Following reports that insurance and securities regulators struggle to share data – and that individuals take advantage of the gap by continuing to sell insurance products despite losing a securities license, for example – FINRA vowed to take action. Beginning this month, the agency said it will provide a monthly report of its disciplinary actions against securities brokers not only to state securities regulators but state insurance regulators as well.

|Educational Series|

Medical marijuana laws put employers in a tough spot

The growing number of jurisdictions permitting medical marijuana is putting employers in a tough position. One the one hand, marijuana remains illegal under federal law and a workforce under the influence isn’t much of a workforce at all. On the other hand, 23 states and the District of Columbia now permit the use of marijuana for regulated medical purposes and some state laws include anti-discrimination provisions prohibiting employers from taking action against employees based on their status as a registered medical marijuana user.

A first-of-its-kind lawsuit demonstrates the conundrum. In December, the American Civil Liberties Union filed suit in a Rhode Island state court on behalf of an individual who allegedly was denied an internship after she disclosed that she lawfully carried a medical marijuana card for severe migraines.

According to the complaint, the company told the applicant that she had been rejected because of her status as a cardholder, and despite promises not to bring medical marijuana on the premises or come to work under the influence, the applicant was denied the position.

The lawsuit charges that the company violated Rhode Island’s medical marijuana law which prohibits schools, employers, and landlords from refusing “to enroll, employ, or lease to, or otherwise penalize, a person solely for his or her status as a cardholder.” The complaint – which also includes allegations of disability discrimination under state law – seeks compensatory and punitive damages.

Employers in states permitting medical marijuana would be well-advised to review their relevant law when considering marijuana use or marijuana-related criminal records in employment decisions. While Rhode Island is not alone in including an anti-discrimination requirement in its law, joined by Arizona, Connecticut, Delaware, Illinois, Maine, Minnesota, Nevada, and New York, other states – including California, Massachusetts, and New York – are clear that employers have no obligation to accommodate an employee’s medical marijuana use or permit them to work under the influence.

Read the complaint.

|Employment Decisions|

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